Representations and Warranties (R&W;) insurance, once reserved for public company and higher-market mergers and acquisitions, is becoming more prevalent in lower middle-market private company M&A; transactions.

Recent trends show that Representations and Warranties Insurance, which provides liability coverage for breaches of representations and warranties made by a seller in an M&A; deal, is now being used in an estimated 25% of private deals. In this article, we provide an overview of R&W; insurance and the potential benefits and risks to both buyers and sellers.

What Does R&W; Insurance Cover and What is Excluded?

R&W; policies cover certain types of losses or damages incurred by the insured (usually the buyer) arising from a seller’s breach of representations and warranties in the definitive purchase agreement. The policies cover losses above a deductible amount (typically equal to 1.0% of the transaction value) up to the amount of the policy limit (typically equal to 10% of the transaction value).

However,



R&W; policies do not cover all losses or damages arising from breaches of representations and warranties Standard coverage exceptions include losses or damages arising from, among other things,
- known liabilities (such as a known lawsuit or known failure to pay taxes),
- purchase price adjustments,
- consequential, punitive or exemplary damages,
- agreements based on projections or forward-looking statements (i.e., failure to achieve some post-transaction sales or earnout metric), and
- breaches of certain “fundamental” representations and warranties (a select category of representations and warranties in every acquisition agreement that are considered so basic or “fundamental” to the deal that a buyer would not do the deal were it known that a fundamental representation and warranty was untrue).

Common examples of fundamental representations include the power of sellers to legally consummate the deal, valuable standing of the seller entity under the state law of i

📌 The Basics of Representations and Warranties Insurance for M&A (Gudivada)
🏢 Linden Law Partners
📍 Gudivada